Why Gold and Silver Stocks Are Positioned to Soon Move Much Higher
Commodities / Gold and Silver 2011 Mar 14, 2011 - 09:29 AM GMTBy: GoldRunner
I am at a loss for words (something that rarely happens to me) as to why so many in the Precious Metals Sector have become so negative at this juncture in this Historic Precious Metals Bull Market. No doubt, many have “2008-itis”, thinking that the Dow is going to crash. Of course, that has been the daily mantra since the top in 2000, hasn’t it?
So says Goldrunner in his latest article just posted on his brand new site going on to say: There is no doubt that the economy continues to deteriorate, and there is no doubt that the type of program of Dollar Inflation in place, debt monetization, will do little to directly help the economy. The program of Dollar Inflation through US Debt monetization, however, keeps rates unreasonably low (negative real rates), and it also creates an inflationary pricing environment. It is difficult for the price of things with intrinsic value to fall in “price” with such a massive Dollar Inflation program underway.
The Intrinsic Value of Gold and Silver is on the Rise
When it comes to things with intrinsic value, Gold and Silver have sat at the top rung on the valuation ladder for thousands of years and the Gold and Silver mining companies have produced the Gold and Silver as well as holding huge reserves in the ground.
Have you shopped for groceries, lately? Do you pay any bills? Have you looked at the price of the various commodities, lately? Things with intrinsic value are seeing sharp increases in price, and these price rises are all a function of the massive Dollar Inflation underway. The deflationists who held their tunnel vision on the deteriorating state of the economy back in late 2008 and into 2009 (and still do to a large extent) said it couldn’t happen. They said that we could not see an inflationary price environment going forward because the Federal Reserve Multiplier System via loans from banks was dead in the water. Well, the FRB multiplier system is not creating the price rises, today. The sharply rising price environment is purely compliments of the massive Dollar inflation via debt monetization.
The Value of the US Dollar is Falling
As the Dollar Inflation continues, the “Value of the US Dollar” falls. As I showed several years ago in anticipation of today, you will not see the extent of the fall in value of the US Dollar via the Dollar Index because that index is a false “pricing system” for the Dollar- one created to protect the US Dollar during times when it is being aggressively printed/ inflated/ devalued. Once global competitive currency devaluations are in play (like today) you will only see the true extent of the fall in value of the US Dollar by looking at the chart of Gold in Dollars. $Gold is around all-time highs, and it will go higher as the Dollar Inflation program continues.
How can the Dollar Inflation programs be abandoned, today? Governments, corporations, and individuals are all underwater since they never bothered to fund their obligations for the future. The only choice that the Fed has at this time is to continue to print and to devalue the US Dollar in an effort to devalue debt and unfunded entitlements that are basically “fixed” in price by contract. As things of value rise via price inflation, the constantly priced debt and entitlements will effectively be devalued against them.
The Gold Parabola Continues to Angle Higher
Sure we will see corrections as the Gold parabola angles higher, but as a parabola grows the up-moves get longer in amplitude while the corrections get shorter in duration. I like to follow the late 70’s Gold Parabola as a comparison to where we are in the Gold Bull, today. At this point in the late 70’s Gold, Silver, and the Precious Metals Stocks exploded higher before reaching an intermediate-term top. The late moves in an up-cycle are almost always the biggest moves in the cycle for the Gold and Silver Sectors. Sure a correction is coming, but I believe that the coming intermediate-term correction is still months off; and I believe that the correction from that higher point will not retrace back down to where we are today.
The Large Cap Precious Metals Stocks Have Been Lagging
So, what does that mean for the Precious Metals stocks? The rising Gold and Silver prices have not yet been fully reflected in the large cap PM stocks. Why not? That is an interesting question that I have not seen addressed. I think a big part of it is due to the predominantly deflationary psychology of the markets. Everybody is still looking for the huge Dow crash, fully expecting that the PM stocks would be tossed out with the crash bathwater. The Dow has moved a long way on the upside since our call for the Dow to bottom and to run up to 12,000 at the bottom back in July, 2010 so some kind of correction could play out - yet this is certainly not a deflationary pricing environment as was present in 1929. Things are constantly being priced higher in lesser-valued Dollars, today.
I think that another large part of the problem for the PM stocks, especially the large cap PM stocks, is the fact that few investors really understand that Precious Metals Mining Companies end up being valued in a major Bull Market based to a large extent on the valuations of their reserves. As Gold and Silver ride up the parabola the reserves in the ground of PM mining companies rise in value. The fringe reserves, called inferred resources, start to become economical to mine causing many of the inferred resources to move into the reserve category yet the re-valuation of reserves to higher prices tends to occur as major price points are reached, exceeded, and held. The top of the Wave III channel around $1400 is one such price point, IMO. Should we now break above that price we could see a sharp move higher in Gold and Silver; and we could expect to see a sharp revaluation of PM mining company reserves, higher.
There is no automatic revaluation of reserves to higher levels. To a large extent reserves are revalued higher by investors voting with their pocketbooks. It is hard for reserves to take on higher valuations while investors are scared to death of a crash across the board. These worries always seem to gel at key price levels such as the top of the Wave III channel I have shown in the arithmetic Gold chart.
Precious Metals Stocks Set to Rip Higher Shortly
If you look at charts of an unfolding Precious Metals Stocks parabola, you will see revaluations higher for the Precious Metals Stocks coming in short bursts higher. The psychology of a PM Bull seems to be an erratic oscillation higher of true fear and greed. Today, with gold around all-time highs, we see fear. I think that for the next few months we will see an oscillation into greed. This was the story of the 1979 Gold Bull. At this point in time, if a comparison to the late 70’s is the correct one, about 90% of the future PM stock gains are still sitting on the table. Much of that rise will occur over the coming years, but at this point the fractal work suggests a nice rip higher into mid-year.
Why Mid-tier vs. Large cap PM Stock Valuations Have Diverged
The other day I was told that someone had penned a piece talking about how grossly overvalued the PM stocks are today. Oh, really? I guess it all depends on your reference points of valuation. There is a huge divergence at this time between the valuations of many of the mid-tier stocks and the valuations of the large cap PM stocks. Many of the mid-tier stocks have had huge runs, mostly bid up by investors as potential company-making drill results were released, or as a company has moved closer to production. These mid-tier PM Stocks can keep right on going higher if the price of Gold and Silver that builds their fundamental foundation of value runs higher from here. Many of the large cap PM stocks, on the other hand, are trading at prices that are lower than their highs back in early 2008 - some as low as their price back in 2002 and in 2003 – even though Gold is trading 3 to 4 times higher than back in the 2002/ 2003 period! It is obvious that the market it looking at “earnings’ much more closely for producers than their value of reserves in the ground. This is akin to somebody looking at their personal wealth in terms of only their “income”, and completely ignoring the things of value that they have saved over the years. It doesn’t make sense, and it will change.
PM Stocks with Large Reserves Have Bright Futures
It is evident that investors are used to buying stocks based on consistent earnings increases like the old “one penny above expectations” we saw in the Nasdaq bubble. PM Mining companies that are accumulating huge reserves that will be worth many multiples of their current value as the Gold Parabola continues rising are being penalized based on their production, now. This begs the question, “Would you rather sell your Gold now for $1,400 per ounce, or would you rather sell your Gold in the future for $3,000, or $5,000, or $7,000, or $10,000, or even $12,000 per ounce?” It is ironic that some investors who hold physical Gold and feel great about its rise in price cannot seem to generalize that concept to a PM mining company holding huge amounts of Gold reserves in the ground- many times along with huge amounts of Silver, Copper, and other minerals. By the end of this Bull market, when the value of the PM reserves in the ground goes parabolic in price, the mantra will be “It’s the reserves- stupid.” This becomes reality as the huge leverage of marginal reserves in the ground, today, eventually become the highly valued measured reserves of tomorrow.
The Psychology of the PM Market is Currently Negative
The reference points will change as the Gold and Silver parabolas rocket higher, just like in the late 70’s. Along the parabolic route, the reserve valuations will move from a lagging average metric to forward-looking higher PM pricing metrics. That is how it was in the late 70’s Gold Bull. “Valuations” are based on the psychology of the market, and around all-time highs today, the psychology of the markets is pretty negative for the PM stocks in general on a relative basis. One major Gold producer has seen its stock price fall to around the same level it traded at back in 2002. This Gold producer has a huge amount of PM reserves. It seems that the reserves are valued lower with Gold around $1,400 than when Gold was selling for around $325 an ounce back in 2002! Go figure. No wonder the PM stock indices are languishing at this time. As an investor I love to see such a glaring discrepancy in value versus perceived value so I can take advantage of it. It looks like the psychology of the market is bent on seeing some farmer buy this company for a dozen eggs one day. Either that or the psychology of the markets toward this major Gold producer is going to change dramatically. What do you think?
Is the Fed done printing Dollars? I don’t think so. The truth is that very little public money has entered the PM Stock Sector at this time. We are just now starting to see the first few PM mining company stragglers make their way over to the NYSE. As time goes by, there will be a flurry of PM Mining Companies making that move. As more PM mining company stocks move to the NYSE and as general stock investors start to see their parabolic climbs, the general stock investors will run to the PM stocks en masse. They won’t care about protecting their assets. They will move into the PM stocks as the parabola continues to climb as they seek upward price momentum. I think you want to be there, first.
THE HUI INDEX
We can see in the chart of the HUI, below, that price has run up from the late 2008 bottom to form a very large cup pattern. At this time the cup has been broken to the upside, and the cup top has been tested. We can see that the current formation is very similar to the price formation of the HUI back in the 2005/ 2006 period right before the HUI moved up sharply in price. To continue the fractal pattern from 2005/ 2006 all we need to see is for the HUI to make a big run upward. Such a run would fit our expectations for Gold and Silver to have a big run into mid-year- a move which would also match the late 70’s Gold and Silver Charts.
The height of the cup is measured from 150 up to 520. Therefore, a run to the upside would likely target around the 900 level based on the height of the large cup formation. I have previously laid out potential targets for the HUI off of the potential cup break-out up to a range of 937 to 970. I still believe those targets are possible by mid-year given my expectation for Gold and Silver to vault much higher in the same time-frame. Since we have already seen the first wave up off of the cup re-test, a move higher starting at any time could be an aggressive one as many negative-minded PM investors suddenly change direction. There is no horizontal resistance left above the late 2010 top on the chart to slow a sharp rise higher. If we get the big move upward, I’d expect it to come in two stages much like the break higher in 2006. A two stage advance would mimic the form of the analogous two stage rise seen at this point in the cycle in the late 70’s in the Gold Chart.
GOLDRUNNER
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